Even after a brutal September that saw the S&P 500 fall nearly -5%, the index is still up 51% since the March 23 bottom.
But for investors feeling like it’s too late to get in on the market’s rebound, one strategist says this one could last another 6 to 12 months.
Canaccord Genuity strategist Tony Dwyer said this week that there was a key certainty factor missing when the market crashed between mid-February and mid-March when the coronavirus pandemic ground the U.S. economy to a virtual halt.
“Back then, you didn’t know even what COVID-19 was,” Dwyer said. “You didn’t know how it was going to affect the economy. We were still in the process of wondering whether we should shut down, and we had no idea how the Fed was going to react.”
But now, Dwyer said, “we know exactly what the Fed is going to do because they explicitly told us. We also know that we’re in a global synchronized pivot higher off of very weak levels in the global economy and that really sets the stage for intermediate-term opportunity.”
Dwyer said in a note to clients last week that the market was “passing over the first speed bump” on the way to recovery over the last few weeks. But the difference between the market’s recent fall and the first 10% leg down in the market back in March is that this recent correction isn’t likely to lead to a much larger decline.
“The question that I had to ask myself is, ‘Why do I want to buy weakness now when I find’t want to buy it in early March?’” Dwyer said. “The answer is the fundamental backdrop is much better.”
Dwyer said that some of his tactical indicators are signaling deeply oversold conditions and appears to be “removing the excesses” that drove stocks to their September 2 peak.
Since that peak, the S&P 500 has pulled back to levels last seen in July. Dwyer added that few stocks were above their 10- and 50-day moving averages and the Cboe Volatility Index, also known as the market’s fear gauge, had troughed. And as these indicators have stabilized over the last week, Dwyer says that investors still have a window of opportunity to take advantage of the market’s recovery.
“What we rely on in the current environment are two things,” Dwyer said. “Number one, we still have an historic amount of excess liquidity. Number two, we have a synchronized global recovery.”
Dwyer believes in this environment of excess liquidity and global economic recovery should be enough to carry the market through the U.S. election in November, which he calls an “uninvestable” event.
“I know we’re supposed to write these great think pieces about what’s going to happen in the political environment, what investors should do,” Dwyer said. “How can you possibly make such an assessment?”
“We don’t know who’s going to win, obviously,” he continued. “It’s a pretty tight race. We don’t know if there’s going to be a Democratic sweep and we don’t know if either side will accept the results. How could you possibly construct a portfolio on such a guess? So, what you’re left with, again, are the two things that have been the driving force behind our bullishness since May: excess liquidity and a synchronized global recovery.”
So where should investors look now? Dwyer likes recovery trades in industrials, materials, financials, and consumer-driven categories.